Is It Time to Place Your Bets on Recovery?

For the millions of American workers idled by the severe stagnation of domestic industrial activity over the past few years, last week's confirmation by Nucor (NYSE: NUE) of meaningful improvement comes as a decidedly welcome development.

Fools may recall that I marveled last week at the surprising strength behind Steel Dynamics' (Nasdaq: STLD) first-quarter results, while pledging to seek confirmation from a major producer like Nucor before jumping to premature conclusions. With Nucor's 416% improvement to net earnings, reaching $159.8 million, the jury is in. American industrial activity made serious strides during the first quarter, and Nucor increased steel shipments 9% year over year.

The steelmaker's capacity utilization jumped to 80%, from 68% in the fourth quarter of 2010. That improved utilization -- coupled with an impressive ability to pass along rising costs in the form of a 22% hike in its average sales price per ton -- escorted sales revenue higher by 32% to reach $4.83 billion in the first quarter.

The company anticipates further improvements for the ongoing second quarter; although CEO Dan DiMicco, in his typically colorful way, described some early indicators for the latter portion of the quarter as "mushy." Absent from both the report and the conference call, were any of the more dire warnings about looming stagnation that this Fool has highlighted in the past. Residential and commercial construction continue as the outlying sources of weakness among industrial segments, but Nucor welcomed the "slow, steady improvement in real demand" observed in several end markets.

Offering further context for these encouraging observations, Eastern railroad hauler CSX (NYSE: CSX) last week reported a 7% year-over-year increase in freight volume, despite a rather weak showing from coal (with only a 3% volume gain). Western counterpart Union Pacific (NYSE: UNP) , meanwhile, reported a more modest 5% uptick in overall volumes hauled. So far this quarter, industrywide coal volumes appear to have slipped below prior-year levels, suggesting that domestic utilities may once again be switching from coal to natural gas as a lower-cost fuel. For an economic outlook hindered by the specter of energy costs, perhaps one can take solace in the potential for electricity rates to exhibit less volatility.

While I am encouraged by the data emerging from these bellwether steel and railroad stocks, I am by no means convinced that these welcome improvements will prove sustainable.

The domestic economy remains a beneficiary of a historic campaign of quantitative easing by the Federal Reserve, and so we have yet to ascertain a clear measure of the industrial sector's strength absent such intervention. My own preferred means of gaining exposure to improving industrial activity in the U.S. (and Europe, for that matter) is via the producers of copper, coal, and other basic raw materials of modern industrial activity. With exposure to a leading copper miner like Freeport-McMoRan Copper & Gold (NYSE: FCX) , or met coal and copper producer Teck Resources (NYSE: TCK) , a Fool can place a broader bet upon industrial growth worldwide, while still retaining attractive upside potential if recovery falters in any one particular region.

Please take our Motley Poll then scroll down to the comments section to elaborate.

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I don't know.Looks more like stagflation to me.Should be interesting to see what the Fed does with this predicament.I know China's central bank is tightening it's monetary policy,but China has high growth and can get away with it.Not so easy for the U.S. Fed to do the same.

Steel (iron ore, to be precise) seems to be a special case, as the chart on page 6 shows. Although I loathe the term "paradigm shift", it seems pretty apt to describe the strength in steel prices today and in the future (notwithstanding the possible near-term correction of a China burst - consumer of 47% of global iron ore production!)

I can understand your thinking behind the miners. Mining companies are without a doubt one of your strong suits.

Transportation stocks should do well over the next decade. I think it would be hard to go wrong with a railroad. I favor NSC because of the extra traffic they will have because of the access they have to the only port on the eastern seaboard that can accomodate Panamax cargo ships. CNI is also a favorite because of the coverage they have across the expanse of Canada and the straight shot from Toronto to the Gulf of Mexico. A bonus is the oil sand exposure they have. All that gear needs to get out there to dig it up, they have that market cornered.

I'm not well versed in the bulk shipping sector but I have become familiar with a smaller company that has a vertual lock on Mississipi barge traffic: KEX. I think they are work a look.

The producers of stee products I have to admit are a mystery to me. From what I remember there is one that is partially state owned in the $30 billion neighborhood in Brazil that I'm heard some buzz about. Anything being partially state owned make my butt twitch.

One sector I think is worth a mention is financials/insurance companies. There are still a few that are undervalued like FRFHF.PK and VR. Granted, this sector will not launch like a pogo stick but historically it has been a fairly reliable revenue generator.